Payout Revisited: Minimum Fighter Payouts

July 2, 2010

MMAPayout.com hasn’t done a Payout Revisited segment in quite some time, but upon reading an article from the Canadian Press on the cost of living for high performance athletes, I thought it might be time to revisit one of my first and most talked about pieces on fighter payouts.

Minimum Fighter Payouts was a part of a much larger Fighter Salaries series in which I talked about all things related to fighter compensation. If you haven’t read the series or don’t remember what I’m talking about, you might get a kick out of running through the gamut again. Here’s a snippet from Minimum Fighter Payouts:

A major interest of the fighters is to be able to provide for themselves and their families. And from a business perspective, it’s probably within the UFC’s interest to provide top-notch fights while also not having to pay anything more than it has to.

 

Talking about the interests of the fighters begs the question, what kind of expenses do they need to provide for? Therefore, taking into consideration monthly expenses such as the money spent on housing, food & supplements, transportation, and saving contributions I have come up with the following rough, yearly before tax requirement that fighters need to meet in order to be financially secure:

 

 

A simple estimate of fighter expenses on a monthly basis (see footnotes following article for explanation of estimate) makes it easy to see why the minimum payouts need to be raised in order to meet their interests (some would call them basic needs). A fighter signed to one of these $3,000 show/win contracts that fights four times a year is lucky to make $24,000 before tax.

 

Keep in mind that there are discretionary and other performance bonuses in a fighters contract, but that they are in no way guaranteed. The sponsorship money for low-end fighters has to be considered minimal, although to be fair there really aren’t a lot of estimates kicking around right now. Also, theindustry standard for an agent’s percentage of a fighter’s purse is around 20%.

 

All of the above were not included in the monthly expense calculations because ultimately they were not necessary to prove my point. However, they deserve mention as additional food for thought.

 

The Solution

 

Get rid of the show/win contracts altogether by moving to a flat-fee and institute a minimum fight payout for all UFC contracts at $10,000/fight.

You’ll understand why I wanted to revisit the issue of minimum fighter payouts when you read the Canadian Press article discussing the living expenses of high performance athletes:

VANCOUVER — High performance amateur athletes in Canada earn about $10,000 a year less than what it costs them to live, train and compete, according to a report prepared for the federal government.

 

Carded athletes reported an average income of $29,649 in 2008, according to the study conducted by Ekos Research Associates Inc. The average Canadian’s personal income that same year was approximately $38,000.

 

At the same time, athletes said they were spending about $500 a month more in sport-related expenses than in 2004, when the last study was conducted.

 

Add in living costs and shelter and the average athlete faces $39,576 in expenses.

Payout Revisited:

I always wanted the chance to revisit this article, because I felt as though it was misunderstood. I did not suggest that a “minimum wage” be implemented within the regulatory system for mixed martial arts. This would imply further government action and the setting of a standard across the industry that most promotions would ultimately be unable to meet. It would be a mess.

However, I did suggest implementing a payout floor through which the UFC would voluntarily pay every fighter at least $10,000 to show. My rationale here was simple: it costs roughly $40,000 a year for these guys to live and train; so, guarantee the fighter $10,000 a fighter (or $40,000/year if he fights in an average of four bouts per year); then, let his sponsorship money cover the difference created by taxes and agent fees.

What’s the benefit to the UFC? A superior in-cage product. If the fighters are able to focus on training – and not a second job – the caliber of fighting will increase to the point that fans see a noticeable improvement in the overall fight product. The quality of the fight product correlates pretty strongly with revenues; for evidence of this, look no further than a comparison of the buyrates between title and non-title bouts.

Moreover, an increase in minimum fighter payouts is also an act that’s bound to generate goodwill within the fighter ranks. This is something the UFC could truly benefit from given its unpopular stance on DVD and video game royalties or the entire sponsorship approval process.

How is this feasible? There are typically only 2-3 fighters per card that make less than $10,000 per fight. If you consider the average minimum payout in the UFC is currently ~$6,000, you’re probably looking at a maximum of an extra $12,000 per (or $360,000 per year). That’s a $360,000 investment to secure the future of the sport.

Might this commit the UFC to even more money in bonuses? No. To ensure that the UFC pays out no more than the extra $360,000 (or whatever rough approximation that may be), it could simply shift the structure of these contracts towards more guaranteed money and less bonus money. For example, a fighter that’s currently signed to a $7,000 show/win contract would instead make $10,000 to show and $4,000 to win (rather than $10,000 show/win or $10,000 show and $7,000 to win).

Why isn’t the UFC already doing this? The UFC may not be guaranteeing fighters a minimum of $10,000 per fight, but its system of discretionary bonuses may very well already pay every fighter on the card a minimum of $10,000. The truth is we don’t know exactly how much each fighter is making. But we do know what each fighter is being guaranteed, and that’s enough to make an argument from the standpoint of cost-of-living.

I could go on for another day about all the arguments for and against increased fighter pay – there are many – but I’ve largely covered a lot of this topic in the aforementioned Fighter Salaries series. If you’ve got some time over the weekend, take a look (it’s lengthy…).

Revisited: UFC Roster Moves Make Dollars and Sense

August 21, 2009

Periodically MMAPayout.com revisits an article previously featured on the site in order highlight an issue, update a prediction, or simply give some of our new readers a look previously unread work.

The big news in the last few days has seen Shane Carwin jump from fighting Cain Velasquez in a contenders match of sorts to fighting Brock Lesnar for the heavyweight title. The UFC’s heavyweight division has come a long way from even a year ago and that was part of the issue that I first discussed upon arriving here at Payout: “UFC Roster Moves Make Dollars and Sense.”

Part 1: May 29, 2008

Lost among all the headlining stories from UFC 84 were the impressive debuts of some very talented prospects. Shane Carwin, who knocked out Christian Wellisch, and Rousimar Palhares, who won submission of the night for his armbar victory over Ivan Salaverry, lead an impressive group of rookies that all put an early stamp on the organization.

 

The debuts also marked the continuation of a growing trend in the UFC: a plethora of new talent to match the mass exodus of UFC veterans. In the last three months alone the UFC has seen impressive fighters like Cain Velasquez, Mac Danzig, Demian Maia, Brock Lesnar, and Tim Boetsch join the UFC ranks. Concurrently, the organization has also seen the likes of Tim Sylvia, Randy Couture, as well as potentially Andrei Arlovski and Tito Ortiz jump ship in search of greener pastures.

 

At this point in time the UFC finds itself in a state of transition, whereby the initial torch bearers are gone, going, or nearly over-the-hill. Couture and Ortiz are both possibly finished, even if they return, how much longer will either of them remain relevant? Furthermore, Liddell, Hughes, and Franklin all appear to be fringe players within their respective title scenes.

 

Despite being the big dog of MMA, the financial reality of the organization in 2008 doesn’t support a free agent signing frenzy. As MMAPayout.com reported in late April, the UFC recently underwent a large staffing layoff in Las Vegas, and over the past few months it has also trimmed its active roster significantly. Last fall, Standard & Poor’s debt rating agency downgraded Zuffa’s credit rating to a BB- , signalling a slight concern on behalf of creditors that the UFC may have a more difficult time in repaying its debt. Add to all of this a downturn in the economy and reduced consumer spending, and it’s easy to see why the financial outlook has changed a little bit.

 

Perhaps what is most remarkable, however, is just how much the current roster situation resembles the plights that many professional sports franchises have experienced in the modern salary cap era. In order to produce superstars and maintain a competitive roster, the UFC is employing a “building through the draft” strategy of its own. Not too dissimilar from the New England Patriots or Detroit Red Wings, the UFC is doing its utmost to find and sign the best prospects in the world before they hit other, large organizations. Then, to complement the roster even further they’ll look to make select free agent additions when and if the price is right.

 

The obvious advantages to this strategy are two-fold: the UFC gets its hands on the best fighters before they blow up and is also able to keep these fighters out of the hands of its competitors. Getting a fighter before he hits the mainstream is quite similar to getting a rookie hockey or basketball player on an entry-level contract – it’s cheaper. Additionally, it gives the UFC full control over the prospects development and marketing. Keeping a fighter away from the competition is almost as important as having him in your own. While many people believe Ortiz is no longer relevant to the UFC’s light heavyweight division, an Ortiz to the EliteXC light heavyweight division gives them instant credibility.

 

However, from a business perspective there is another, not-so-obvious, benefit to using a prospect strategy when building a fight roster and that is the creation of negotiating leverage. EliteXC, Dream, and Affliction are all promotions which have the ability to pay six figure fight salaries and that means for the UFC leverage is quite hard to come by these days. In constantly topping up its division with the best prospects in the world, the UFC is bettering its bargaining position when it sits down to negotiate or renegotiate with fighters.

 

One of the keys to negotiation is understanding your position from the perspective of alternatives; if a deal cannot be reached, what is your best alternative? In this case, the UFC’s alternatives become numerous. It was likely a combination of Tim Sylvia and Andrei Arlovski’s recent lacklustre performances and the addition of heavyweight prospects like Cain Velasquez, Shane Carwin, Neil Wain, and Brock Lesnar that enabled Dana White and the UFC to feel comfortable walking away from the two former heavyweight champions.

 

Furthermore, the UFC also improves its bargaining position with an appeal to competition, which in effect reduces the negotiating leverage of other organizations. In other words, it tempts a fighter to sign and fight where the competition is (the UFC), prove himself, and then look for a big pay day.

Part 2: May 30th, 2008

Signing prospects to initial fight contracts is only part of the prospect strategy; development and promotion are the other two intangibles at work here. In order to make the most of the talent they sign, the UFC will also need to develop these fighters through intelligent match-making and steadily increasing levels of exposure. Josh Koscheck, a former NCAA Division 1 wrestling champion and TUF alumnus, is a textbook example of how to properly develop a prospect with serious upside.

 

Koscheck’s Fight Record since 2005:

 

  • TUF Finale (April 2005) – Chris Sanford (Win)
  • Ultimate Fight Night (August 2005) – Pete Spratt (Win)
  • Ultimate Fight Night 2 (November 2005) – Drew Fickett (Loss)
  • Ultimate Fight Night 4 (April 2006) – Ansar Chalangov (Win)
  • Ultimate Fight Night 5 (June 2006) – Dave Menne (Win)
  • Ultimate Fight Night 6 (August 2006) – Jonathon Goulet (Win)
  • Ultimate Fight Night 7 (December 2006) – Jeff Joslin (Win)
  • UFC 69: Shootout (April 2007)- Diego Sanchez (Win)
  • UFC 74: Respect (August 2007)- George St. Pierre (Loss)
  • UFC 82: Pride of a Champion (March 2008) – Dustin Hazelett (Win)

 

The key to developing a fighter is not to protect him, nor is it to throw him to the wolves. Rather, it means wisely matching him against opponents to push his level of development while not significantly overmatching him in any one particular aspect. If you look to recent UFC cards, including 84, you’ll see that many of the rookies faced solid challenges, but none were in over their heads. Brock Lesnar, of course, may be the only exception to the recent string of great debuts and match-ups.

 

The second critical element involved with helping a fighter achieve his potential is exposure. The last scenario the UFC ever wants to encounter again is a talented fighter like Nate Marquardt thrust into title contention with little to no mainstream exposure. Although, if UFC 84’s eight televised fights are any indication, Dana White might be having a change of heart in regards to the number of fights that PPV fans deserve to see.

 

Additionally, the trimming of the UFC roster means the organization has fewer obligations and fight commitments than it did before, which increases the likelihood of seeing young prospects on Fight Night cards or PPV undercards. As MMAPayout.com reported in April, a network TV deal is also expected to come within the next 6-moths, giving the organization an even bigger stage to expose its stars.

 

With all of that said, the UFC’s roster strategy isn’t without its question marks and potential problems. First and foremost, there is the lingering question that always must be raised in regards to the psyche of the North American sports fan: will they support a non-American superstar the same way they would a Chuck or Tito? Current evidence seems to indicate that non-American fighters do not have the same support and following as Americans. The world’s best pound-for-pound fighter Anderson Silva draws nearly half the PPV buys of Chuck Liddell or Tito Ortiz when headlining a fight card.

 

The UFC is currently trying to hedge itself against this xenophobia with plans to continue its expansion into the UK and Canada, while also seriously considering Mexico and Brazil among others. It’s necessary to caution on a diversified strategy, however, because while diversity is a good bet in any business, you cannot spread yourself too thin. S&P’s last report indicated that the company was faced with decreasing margins in 2007 due to the increasing costs largely due to holding events oversees.

 

Perhaps, then, the UFC’s greatest challenge in the future will not be signing, matching-up, or even finding airtime for its fighters, but rather finding the right kinds of exposure for them. Not every person has the mainstream appeal of a Tito Ortiz, or intimidating, must-see edge of a Chuck Liddell. The UFC will have to work around those inabilities with fighters; especially the ones with little to no English or the personality of vanilla ice cream.

 

What does this all mean? The UFC is going to have to think outside the box, and possibly undergo a shift in its higher-level positioning strategies. For years, the organization has maintained a brand building strategy: organization first. Although it has served the company well – MMA and the UFC have largely become synonymous in North America – the strategy is probably outdated.

 

If you look at the rest of the professional sports making headlines with the major publications you’ll notice that they’re all driven by the individuals. Nobody is in love with the NFL or NBA or Major League Baseball and certainly not the NHL. The fans are in love with the teams, players, and personalities associated with the league: the Brett Favre’s, Lebron James’, Derek Jeter’s, and Sidney Crosby’s of the sports world. Thus the next step towards true mainstream acceptance lies within creating the bigger, badder, and ultimately better Chuck Liddell’s and Tito Ortiz’s of the future.

 

The ducks are essentially in a row for the UFC at this point in their life cycle: they’ve got the right roster building strategy and are beginning to develop some great fighters. The question is whether or not they’re truly going to push the fighters and allow them to bring the sport into the mainstream. That type of complete roster building strategy could truly make dollars and sense for the organization.

Payout Perspective:

What a difference a year makes in the operating landscape: both EliteXC and Affliction are gone, seemingly replaced by Strikeforce and Bellator; the UFC is having its strongest year ever and no longer worried about another drop in its credit rating; and the American economy isn’t much of a concern for the organization (except maybe in Oregon…).

What a difference a years worth of hindsight makes: Sylvia and Arlovski aren’t so much as an after thought in today’s heavyweight picture; we’re still waiting for that UFC TV deal; Brock Lesnar is becoming one of those “individuals” capable of driving the UFC’s business; and prospects like Carwin and Velasquez are perhaps no longer considered prospects as they’re developing properly.

On that last note, take a look at the fight progression of both Carwin and Velasquez in the UFC; it’s another example of intelligent matchmaking designed to incrementally build a fighter’s skills and confidence with stiffer competition at every turn.

Shane Carwin

  • 10/27/2007 (Art of War) – Rex Richards (win)
  • 12/1/2007 (ROF) – Sherman Pendergarst (win)
  • 5/24/2008 (UFC 84) – Christian Wellisch (win)
  • 10/18/2008 (UFC 89) – Neil Wain (win)
  • 3/7/2009 (UFC 96) – Gabriel Gonzaga (win)
  • 11/21/2009 (UFC 106) – Brock Lesnar (?)

Cain Velasquez

  • 4/19/2008 (UFC 83) – Brad Morris (win)
  • 7/19/2008 (UFN 14) – Jake O’Brien (win)
  • 2/7/2009 (UFN 17) – Denis Stojnic (win)
  • 6/13/2009 (UFC 99) – Cheick Kongo (win)
  • 10/24/2009 (UFC 104) – Ben Rothwell (?)

Those are solid development paths.